Basking in the shadows? Regulators are watching you

DAVOS Switzerland Jan 26 (Reuters) - Unconventional lenders
that have enjoyed a cozy spot while central bankers were busy
trying to make banks stronger should watch out as shadow banking
is coming back on to regulators' agenda.

Shadow banking, broadly described as intermediation by
non-banks such as hedge funds, private capital and venture
funds, has so far escaped traditional banking regulation even
though some regulators say it worsened the global financial
crisis.

Rebuilding bank capital and the fight to save the euro have
taken absolute priority over the past five years.

But Financial Stability Board head Mark Carney told the
World Economic Forum in Davos that central bankers will finally
be addressing this "forgotten bit of reform" as they try to
complete a overhaul of financial regulation over the next two
years.

"Shadow banking, over-the-counter derivatives, these are the
areas that absolutely amplified the last crisis and will do so
again unless we complete our agenda," said Carney, who will
leave his current job of Bank of Canada governor to head the
Bank of England in July.

The shadow banking sector has been booming since the onset
of the global financial crisis in 2007 and stood at $67 trillion
worldwide last year according to data from the FSB.

The fact that banks had been forced to hoard capital to
build larger buffers against risks has opened up room for new,
non-bank players to come into these segment, especially to
provide credit to smaller firms.

"Shadow banking is a reality. Investors that had been
traditionally providing equity are now providing debt," said
Stefano Aversa, co-president of AlixPartners.

"This is not just the traditional loan-to-own space but we
also see much loan-to-loan to fill up the gap created by the
credit crunch."

NEW PROPOSALS

The FSB is expected to make proposals on how to regulate
this dark area of the financial sector before the G20 autumn
summit in Russia, where the issue will be debated, regulatory
sources told Reuters.

The issue has become controversial also in China, where the
$2 trillion sector has come under more closer scrutiny after the
default of an unregulated short-term fund distributed through a
Shanghai branch of Hua Xia Bank Ltd.

Such high-yield products are known locally as 'wealth
management products'.

"You can't say shadow banking is a bad thing simply because a
lot of people don't understand it," argued Hony Capital CEO John
Zhao, whose firm has $7 billion in assets under management.

"When a country's economy is growing as fast as China's,
it's inevitable that different forms of financing will appear.
They serve real needs, and serve to fill little areas that the
banking system cannot reach."

JP Morgan Chase CEO Jamie Dimon also defended the
sector at a panel session in Davos, saying they provided
necessary services to the economy.

But AlixPartners' Aversa conceded that there was an issue
when it came to transparency.

"We've seen a lot of activity move away from the banks, to
the capital markets," Zhu Min, deputy managing director of the
International Monetary Fund said.

"Both the banks and the shadow banks should have a proper
regulatory framework to govern them."